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On Friday, the IRS announced changes in the filing
requirements for Schedule M-3, Net Income (Loss)
Reconciliation, for certain corporations and partnerships. For
tax years ending on or after Dec. 31, 2014, certain corporations and
partnerships will be permitted to file Schedule M-1,
Reconciliation of Income (Loss) and Analysis of Unappropriated
Retained Earnings per Books, in place of Parts II and III of
Schedule M-3, which reconcile net income or loss per the income
statement and report expense and deduction items. However, these
entities will still have to file Schedule M-3, Part I, Financial
Information and Net Income (Loss) Reconciliation.

The change applies to corporations and partnerships that have at
least $10 million but less than $50 million in total assets at tax
year end and that file Forms 1120, U.S. Corporation Income Tax
Return; 1120-C, U.S. Income Tax Return for Cooperative
Associations; 1120-F, U.S. Income Tax Return of a Foreign
Corporation; 1120S, U.S. Income Tax Return for an S
Corporation; 1065, U.S. Return of Partnership Income; or
1065-B, U.S. Return of Income for Electing Large Partnerships.

If such entities choose to file Schedule M-1, the book income they
report on Schedule M-1, line 1, must match the book income they report
on Schedule M-3, line 11. These entities will not be required to file
Form 1120, Schedule B, Additional Information for Schedule M-3
Filers; Form 1065, Schedule C, Additional Information for
Schedule M-3 Filers; or Form 8916-A, Supplemental
Attachment to Schedule M-3.

The IRS says that partnerships with less than $10 million in total
assets that are currently required to file Schedule M-3 will continue
to file Schedule M-3, Part I, but may elect to file Schedule M-1 in
place of Schedule M-3, Parts II and III. Partnerships with less than
$10 million in assets will not be required to file Form 1065, Schedule
C, or Form 8916-A. These partnerships include those with total
receipts of $35 million or more or that have a reportable entity
partner who is also required to file Schedule M-3.

Corporations and partnerships with less than $10 million in total
assets that are not otherwise required to file Schedule M-3 are
currently permitted to voluntarily file Schedule M-3. The IRS says
these taxpayers may continue to voluntarily file Schedule M-3 and may
elect to file Schedule M-3, Parts I, II, and III, or to file Schedule
M-3, Part I, and to file Schedule M-1 in place of Schedule M-3, Parts
II and III. These corporations and partnerships will not be required
to file Form 1120, Schedule B; Form 1065, Schedule C; or Form 8916-A.

The IRS says the reason for the change is to reduce these entities’
filing burden and simplify reporting. It also says that its Large
Business and International (LB&I) Division is looking at other
changes to Schedule M-3 and to the requirements for book-tax
reconciliation for corporations with $10 million to $50 million in
total assets that are life insurance or property and casualty
insurance companies or that file as a mixed group (i.e., file a
consolidated return that includes an insurance company and a
noninsurance company or both a life insurance company and a property
and casualty insurance company), including the requirement that mixed
groups subconsolidate and file Form 8916, Reconciliation of
Schedule M-3 Taxable Income With Tax Return Taxable Income for Mixed Groups.

The Schedule M-3 reporting requirement has been in place since 2004.
It requires corporate and partnership entities that report assets of
$10 million or more on their Schedule L balance sheet to reconcile
taxable income or loss with financial statement income or loss.

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